No matter how cheap some stocks get, it's just not worth taking the risk.
Case in point:
The stock fell 42% Monday after the company warned that fourth-quarter and full-year earnings would miss estimates due to higher marketing, advertising and educational services expenses. Revenue also has fallen below the firm's estimates due to higher attrition, later-than-expected branch campus openings and negative publicity related to recent litigation.
The guidance wasn't as disappointing as the drop in share price might suggest. Profits for the fourth quarter are expected to hit 19 cents or 20 cents a share compared with analysts' 28-cent forecast. For 2004, earnings are expected to reach 86 cents or 87 cents a share, below the 96-cent estimate. Still, some analysts felt the slide in the stock price was justified.
"Given the visibility associated with the postsecondary education business model, this type of earnings shortfall is unprecedented in our view and reflects a lack of internal controls for the company," said J.P. Morgan analyst Bradley Safalow.
Safalow, who downgraded the stock to underweight from overweight Monday, said he "would not grow more constructive" on Corinthian until there is evidence that the firm can control costs.
Merrill Lynch analyst Lauren Fine, who cut her rating to neutral from buy Monday, said Corinthian was cheap before the announced shortfall and is even more attractively priced today, particularly given the positive fundamental outlook for the industry.
College enrollment is expected to be strong over the next decade as more students graduate from high school. In fiscal 2004, Corinthian's enrollment grew almost 50%. "But until there is a better comprehension of the industry growth rate and company-specific issues, we do not believe a case can be made to put new money into the stock," Fine said.
Although Corinthian trades at about 12.3 times 2004 profit estimates, it isn't clear what multiple to place on 2005 earnings. The firm lowered estimates on the first quarter of fiscal 2005 to between 17 cents and 19 cents a share, down from analysts' 27-cent forecast, and said it won't meet its target of $1.28 for the full year. In addition, the company said that for future periods, it will provide guidance only for the next fiscal quarter.
"The company's decision to only provide one quarter forward guidance also creates additional uncertainty about management's ability to effectively monitor costs and execute on a growth strategy," said Safalow.
Perhaps the greatest uncertainty among investors relates to the regulatory scrutiny surrounding the company. On Monday, the firm said it had met with personnel from the California attorney general's office and provided them with information they had requested regarding three previously settled lawsuits.
In June, the U.S. Department of Education said it found improprieties in the way Corinthian helped students apply for financial aid at one of its colleges. Inspectors found that school officials had helped students change financial aid documents to obtain higher contributions toward tuition fees, according to the
The firm now faces a class-action lawsuit, with shareholders alleging that Corinthian manipulated documents and fraudulently received funds from the federal government. Corinthian has said the charges are without merit.
"We still see risk that the
and the Department of Education will approach the company with questions in the coming weeks," said UBS Investment Research analyst Kelly Flynn. "While CoCo's shares look inexpensive, we prefer to remain on the sidelines ... even on today's weakness."
Some analysts suggest that a change in management is needed at the company before investors can have any confidence in the stock. Harris Nesbitt analyst Jeffrey Silber said management has "credibility issues" because the company had been somewhat bullish during its investor presentations in May and June.
"A change in management could be a favorable catalyst for the stock, given the crisis of confidence among investors in the current team," agreed Safalow.
Corinthian, which is now down 62% since the start of the year, isn't the only company in the education space to be hurt by regulatory issues.
is under investigation by the Securities and Exchange Commission for allegedly falsifying its enrollment records and financial data. The company also has dbeen hit with a class-action lawsuit. In December, an employee at the firm filed a complaint alleging that officials forged signatures and tampered with student files in an effort to inflate enrollment and the company's profits.
ITT Educational Services
saw its offices and 10 campuses raided by the FBI in February amid concerns about the way the company calculates graduation rates, grades, admissions and salaries of graduates.
Shares of ITT were down 5.5%, or $1.76, to $30.09, while Career Ed skidded 13.4%, or $4.54, to $29.27. Corinthian was off 43%, or $7.98, to $10.74. Career Ed is down 27% since the start of the year and ITT is off 36%.